Higher milk production may trim price

For the U.S. dairy industry, 2004 was a year of records — matching 2003 for record output; commercial use records for both milkfat and skim solids; and record average prices.

This year likely won't need as many superlatives, but it is nonetheless “shaping up as a memorable year,” says James J. Miller, agricultural economist for the USDA's Economic Research Service.

“Production and use probably will again set records, with prices declining only moderately,” he said at the annual Agricultural Outlook Forum 2005 at Arlington, Va.

However, returns for dairying in 2005 are expected to be “considerably below 2004's very high levels, but still relatively strong.”

Milk production last year “struggled somewhat,” but was essentially the same as 2003's record.

Despite high prices for milk and milk products, producers interpreted it as a unique set of circumstances rather than a fundamental change in long term prospects and “were very cautious” about expanding their farms, Miller said.

Other forces helped to limit response to record milk prices:

The number of dairy replacement heifers was significantly smaller at the start of 2004, particularly for heifers due to calve in 2004.

The ban on imports of Canadian breeding stock aggravated the heifer shortage.

Exercises in cooperative supply management removed capacity early and also kept those cows from becoming part of the replacement pool.

Growth in milk per cow, relatively weak through most of 2003, was further hampered by sharply reduced availability of the BST growth hormone in 2004, significantly reducing milk per cow.

Most major dairy areas were confronted with forage quality problems during part of 2004.

Dairy replacement heifer numbers Jan. 1, 2005, were 3 percent higher than a year earlier, with the same increase in heifers expected to calve in 2005 as for younger heifers.

Ease tightness

“This increase should significantly ease the heifer tightness this year,” Miller said, “and has already resulted in a small moderation in heifer prices. Even so, prices for heifers this year are likely to remain relatively high. Without imports from Canada, even the larger number of heifers may be less than desired.”

Farmers leaving dairying “probably will accelerate a little as the year progresses, particularly if the Milk Income Loss Contracts program expires as scheduled at the end of September. But even weaker operations will likely be relatively well-positioned to resist exiting after two years of strong returns. Stronger farms will probably stay cautious about expanding until the size of the recovery in milk production is seen, although accumulated earnings will tend to spur some expansion as 2005 goes on.”

Milk per cow is projected to rise about 3 percent in 2004, Miller said, which is “significant, but far from complete recovery from the sluggish expansion of the past two years.” The higher output per cow would push milk production up by about 2 percent, “the first real growth since 2002.”

Cheese and butter demand in 2004 was “amazing,” Miller said, as commercial use of dairy products rose to a record level, despite sharp increases in most dairy prices. “Dairy demand in 2004 was clearly extraordinary.”

Cheese use gain

The 3 percent increase in commercial cheese use “was the largest increase since 2000 and may be the greatest jump in apparent cheese demand ever recorded. In some ways, butter demand was even more impressive — even though commercial use rose only fractionally, wholesale prices average more than 60 percent higher than a year earlier.”

Dairy demand is expected to stay good in 2005, Miller said. “The economy and incomes are projected to continue to grow at a relatively strong pace, while food and restaurant spending seem to have shaken off the doldrums of 2002 and 2003.”

International dairy markets “remain tight,” he said, and the weakness of the U.S. dollar “is translating this tightness into relatively high prices.”

Commercial exports of non-fat dry milk are projected to be “sizable” in 2004, Miller said. “Even with some possible softening of market conditions, international markets will probably need substantial quantities of U.S. milk powder. The weak dollar will certainly help exports, but domestic prices are projected to be high enough to limit attractiveness of U.S. supplies.”

Demand is not expected to be able to absorb the projected increase in milk production “without a substantial price adjustment,” he said. “But a $1 to $2 decrease from $16 per hundredweight still leaves relatively attractive milk prices.”

Early 2005 milk prices have been above a year earlier, but this spring's prices “will be much below last year and are expected to stay below a year earlier in the second half. For the year, milk prices are expected to decline $1 to $2.”